Fall 2008 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

nature or are controlled by other governmental bodies. These not-for-profit organizations often fall into a gray area between private and government and should follow this guidance on deciding whether to apply government accounting standards or private-industry accounting standards. Many of these entities are not created by state statute as a body corporate or politic, but rather under the state’s general corporate or not-for-profit corporation laws. Many entities also do not perform governmental functions and are not controlled by other governmental bodies through the appointment process. Such entities should closely evaluate the parameters of the staff paper. The obvious and most primary unit of government – excluding the federal government – is a state or territory of the United States of America and the District of Columbia. Other entities that are considered governments result from their creation by the state to perform or to facilitate the performance of a state’s functions. These governments are those that are created by state constitution or statute, statutory enabling legislation or local ordinance. Those created by a state are often defined as either municipal or quasi-municipal corporations. They are further divided into general-purpose governments, which include cities and counties, and special purpose governments, which include school districts, special districts and public authorities. Some organizations that are considered governments are not created by state statute or local ordinance but are created by both elected or appointed officials acting in their capacity as public officials through a state’s general and not-for-profit corporation laws. These entities should be considered governments and follow governmental GAAP if they possess one or more of the following characteristics: • Popular election of officers or appointment (or approval) of a controlling majority of the members of the organization’s governing body by officials of one or more state or local governments. • The potential for unilateral dissolution of the organization by a government with the net assets reverting to the government. • Have the ability to issue directly (rather than through a state or municipal authority) debt that pays interest exempt from federal taxation. • The power to enact and enforce a tax levy.

The staff paper also discusses that in certain circumstances, organizations that are not created by governments or their public officials but perform government functions may need to be accounted for under governmental GAAP. This analysis requires professional judgment, and the decision should be based upon factors including previous legal decisions within the jurisdiction; classifications by the U.S. Bureau of Census; the relationship between a governmental entity and the not-for-profit concerning management and the use or sharing of resources; and, finally, the basis for the organization’s federal income tax exemption. Some illustrations, which are discussed in the staff paper, demonstrate how certain organizations would be classified under various facts and circumstances (1) : 1. Drug counseling, job training and youth recreation services are provided in four cities through multi- service centers. In each city, 100 percent of the costs of operating the center is financed (derived from federal, state and city grants) through contracts between the city and the multi-service center. All of the contracts with the multi-service centers are based on budgets and program plans submitted by the centers to the cities; all of the contracts require monthly performance reporting to the city’s social services departments; and all are subject to audit for compliance with contract clauses and reasonableness of costs incurred. a. City A’s multi-service center was created by city ordinance pursuant to state enabling legislation as a “body corporate and politic.” It financed its building by directly issuing tax-exempt debt, as authorized by law. Its three-member governing body is appointed by and serves at the pleasure of the mayor. b. City B’s center was incorporated under the state’s not-for profit corporation laws and is an IRC 501(c)(3) corporation. The city’s social services commissioner and her counsel were the incorporators. It financed its building through tax- exempt debt issued by the state’s housing finance In each city, however, the multi-service center is organized differently:

(1) Governmental Accounting Standards Board, November 1993, “Applicability of GASB Standards to Not-for-Profit Entities – A Staff Paper.”

44 ◆ fall 2008 issue